The Polycomb repressive complex 2 (PRC2), which contains three core proteins EZH2, EED and SUZ12, controls chromatin compaction and transcription repression through trimethylation of lysine 27 on histone 3. The (7;17)(p15;q21) chromosomal translocation present in most cases of endometrial stromal sarcomas (ESSs) results in the in-frame fusion of the JAZF1 and SUZ12 genes. We have investigated whether and how the fusion protein JAZF1-SUZ12 functionally alters PRC2. We found that the fusion protein exists at high levels in ESS containing the t(7;17). Co-transient transfection assay indicated JAZF1-SUZ12 destabilized PRC2 components EZH2 and EED, resulting in decreased histone methyl transferase (HMT) activity, which was confirmed by in vitro studies using reconstituted PRC2 and nucleosome array substrates. We also demonstrated the PRC2 containing the fusion protein decreased the binding affinity to target chromatin loci. In addition, we found that trimethylation of H3K27 was decreased in ESS samples with the t(7;17), but there was no detectable change in H3K9 in these tissues. Moreover, re-expression of SUZ12 in Suz12 (−/−) ES cells rescued the neuronal differentiation while the fusion protein failed to restore this function and enhanced cell proliferation. In summary, our studies reveal that JAZF1-SUZ12 fusion protein disrupts the PRC2 complex, abolishes HMT activity and subsequently activates chromatin/genes normally repressed by PRC2. Such dyesfunction of PRC2 inhibits normal neural differentiation of ES cell and increases cell proliferation. Related changes induced by the JAZF-SUZ12 protein in endometrial stromal cells may explain the oncogenic effect of the t(7;17) in ESS.